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Hedge Clippings | Friday, 11 June 2021
The Economy's going gang busters - inflation to follow?
By all accounts the Australian economy is going gangbusters. That's probably not a term widely used in economic lectures or textbooks, but we don't propose to enrol at the local university, or purchase such books, to find out. Quite simply, all the signs point that way.
For instance, this week's headlines include this article on Australia's business activity reaching new highs in May. It's not only a local trend, as the global economy is doing the same: "World Bank sees 5.6% global growth in 2021, best since 1973..." Or from Reuters, "US job openings hit record highs in April..."
One reason of course is the bounce back from depths of despair the economy seemed to be in during the first half of 2020. Much of it is due to the massive stimulation measures introduced by governments, and adopted by central banks. And central banks have been printing bucket loads of money for over a decade, and have lowered interest rates to a point where property prices, along with equity valuations, are at all-time records.
And the Australian housing market isn't the only thing that's unaffordable. According to this report quoting the Bank of England's chief economist, Britain's housing market is "on fire".
The question is, will this all end in tears? Doomsdayers have been predicting this for much of the last decade, although to date they've yet to be proven correct. The danger of course is that when - or if - the central bank intervention does come to an end, the debt mountain, both public and private, will be even larger than it was when they first flagged the problem.
Theoretically the debt mountain can get a lot higher yet, were it not for inflation which has been dead, or at least dormant, for a decade or so. Ironically it was high inflation that caused economies to go into a tailspin back in the 70's and 80's, and having put it to sleep, central banks have been trying to revive it - gently - for the past few years.
With a revival of inflation will come an increase in interest rates, and the debt mountain will, for both the public and the private sector, become a repayment hangover to end all hangovers. Deutsche Bank this week released a research report entitled "What's in the tails? - Inflation: the defining macro story of this decade" which contains a stark warning that the potential for higher inflation will bring a return of boom/bust cycles over the next few years.
If you would rather see the pictures to get the point, below is a chart of both Chinese PPI (blue) and US CPI (red) over the past 4 years. Having exported deflation for the best part of the last 20 years, the jump in the index of Chinese consumer durables is a clear indication of the road ahead.
As the Insights article from Delft Partners below points out, Deutsche Bank are by no means the only ones warning about the dangers of inflation caused by the robust economic activity. Delft quote over a dozen leading US corporates across a range of sectors confirming inflation is in the pipeline.
Or should that be "in the Priceline?"
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